CDL H-Trust – UOBKayHain
CDL Hospitality Trusts
Key takeaways from company visit
Management reiterates our positive view on the stock. CDREIT is a key beneficiary of the expected recovery in visitor arrivals in Singapore. Maintain BUY with a target price of S$2.25.
Corporate Event
We met the management of CDL Hospitality Trusts (CDREIT) on 8 March. Investor queries were centred on the following: a) occupancy levels and average room rates, b) impact of opening of integrated resorts (IR), c) recent acquisition of Australian portfolio, d) potential acquisitions, and e) buyer profile.
Stock Impact
Occupancy levels to remain close to 90%. CDREIT’s 4Q09 occupancy rate stood at 88.9%, better than the pre-crisis occupancy levels of 2007-08 during the same period. November’s occupancy of 93% is the highest monthly occupancy since CDREIT’s listing in 2006. Management remains upbeat that the high occupancy levels are here to stay and expects demand to remain strong even after the opening of 1,350 rooms at Resorts World at Sentosa (RWS). We expect CDREIT’s occupancy levels to stay close to 90% in 2010 on the back of a strong recovery in visitor arrivals in 2010 (January visitor arrivals up 17.6% yoy) combined with an increase in ALOS.
Weekend occupancy to be boosted by opening of IRs. CDREIT’s customer base comprises about 70% business travellers and 30% leisure travellers. Its hotels generally enjoy very high occupancy levels of above 85% on weekdays and 75% on weekends. Management expects a strong
pick-up in demand for its hotels from leisure travelers during weekends as Singapore gains traction as a mono tourist destination with the opening of the IRs. CDREIT will also benefit the most from the spillover effects of the strong demand for RWS hotels, with its strategically-located hotels being close to the IRs.
ARR to spike in 2011. Management notes that the increase in ARR has not kept up with the pick-up in occupancy levels as close to 30% of room rents were locked in last year from their corporate clients. Management expects room rents to start picking up in 2H10 with the sustained high occupancy levels. We forecast ARRs to increase 10% in 2010 and 15% in 2011.
Australian acquisition done at near distressed levels. CDREIT recently acquired five hotel properties in Brisbane and Perth for A$175.1m, or A$153,600 per key. The acquisition was done near distressed levels at steep discounts of up to 66% to the current replacement. Management noted the occupancy levels for these hotels have remained above 83% over the last three years despite the economic crisis, and expects RevPAR to improve in the coming years on the back of high occupancy levels, fuelled by economic growth and tight supply of hotels in these regions.
Actively seeking more acquisition opportunities. CDREIT’s net debt-toasset ratio stands at 0.3x with the acquisition of the Australian portfolio.
Management views 0.45x as a comfortable gearing level in the present conditions, giving an additional debt headroom of about S$200m, and is on the active lookout for acquisition opportunities in Australia, Thailand and Japan. In Singapore, management sees the possibility of Studio M and St.Regis hotels, owned by parent City Developments and Millenium & Copthorne Hotels, being injected into its portfolio over the next two years, and South Beach hotel in the long term.
Earnings Revision
We maintain our earnings estimates.
Valuation/Recommendation
Maintain BUY with a target price of S$2.25, based on our two-stage dividend discount model (required rate of return: 7.7% and terminal growth rate: 2.5%).
Hospitality REITs – OCBC
Riding on earnings recovery
Growth projected for tourist arrivals. The Singapore Tourism Board (STB) is projecting 11.5m to 12.5m visitor arrivals to Singapore in 2010, up 18.6% to 28.9% from the 9.7m visitors in 2009. It also projects S$17.5b to S$18.5b in tourism receipts this year – up a whopping 40% to 49% from S$12.4b in receipts last year. Catalysts include the opening of the two Integrated Resorts (IRs), the 2010 Youth Olympic Games, and the recovery in the global economy. The STB has a 2015 target of 17m visitor arrivals and S$30b in tourism receipts.
Riding on earnings recovery. The estimates bolster the earnings recovery theme for hospitality REITs CDL-Hospitality Trusts [CDREIT, NOT RATED] and Ascott Residence Trust (ART). The two REITs saw RevPAR1 declines of roughly 28% and 14.5% respectively in FY09 on subdued individual and corporate travel expenditure. We expect hospitality players to enjoy revenue growth this year on the back of improving occupancy and a stabilization (and potential recovery) in room rates. CDREIT is a more direct beneficiary of the new developments on the local scene due to its shorter stay profile and its larger exposure to Singapore vis-à-vis ART. Both REITs should benefit, in our opinion, from the increased MICE space and the potential draw of the IRs (Las Vegas rents more convention space than any other US city).
Earnings growth from acquisitions. CDREIT took advantage of its low leverage (19.1% as of 31 Dec 2009) and the availability of distressed opportunities to enter the Australian market through the acquisition of five hotels. The properties were acquired at a discount of up to 66% discounts to their current replacement value (including land costs). We see limited debt headroom for ART at its current leverage level (41.2% as of 31 Dec) but believe it may still be able to make accretive acquisitions through a combination of debt and equity. Its manager is also focusing on asset enhancements.
Valuations still compelling. CDREIT and ART are up 302% and 251% from their 2009 lows. Nevertheless, we believe ART’s valuations remain attractive at 0.92x book. Depending on the trajectory of the hospitality recovery, there could be room for further upwards earnings revisions (we are currently below consensus). CDREIT and ART are trading at 6% and 6.4% FY10F yields respectively (based on consensus for CDREIT). We do not have a rating on CDREIT. Maintain BUY with S$1.38 fair value for ART, one of our top picks for the S-REIT sector.
CCT – OCBC
Working towards refinancing
Tapping on the MTN market. Recently, CapitaCommercial Trust (CCT) issued S$70m of fixed rate notes under its S$1bn Multicurrency Medium Term Note (MTN) Programme and proceeds will be used for repayment of borrowings and working capital purposes. At the same time, CCT also announced that it had repurchased an aggregate principal amount of S$15m of its convertible bonds (CB) that mature in 2013. This is part of the effort to prepare for its refinancing requirement in 2011 as the CB holders have a put option exercisable in May 2011 that would require CCT to redeem the CB. The CB is currently deep out-of-the-money (conversion price of S$1.8349) and the possibility of share price reaching the conversion price by May 2011 seems low. We expect CB holders to exercise the put option next year, which would bring forward the maturity of the CB.
Higher average cost of debt expected. In comparison to other recent MTN issues, interest rate secured by CCT is on the high side among the MTNs with 5-year maturity (3.288%-3.64%). This came as no surprise, given the weak office sector outlook and thus the higher risk premium compensating the MTN holders. Despite the low interest rate environment, we expect average cost of debt to trend higher in 2010 as the cheaper MTN issued prior to the crisis matures this year and is refinanced by new MTNs with higher cost of debt.
Pro-active efforts towards refinancing. While recent capital management efforts may not have significant impact, we are still encouraged by the pro-active efforts that the management took to prepare for refinancing next year. As much as S$1,010m of borrowings could be due for refinancing in 2010 (CB holders exercise put option) but unencumbered assets of S$2.6bn (after sale of Robinson Point) should provide sufficient collaterals to secure new loans for refinancing. A reconstitution of CCT’s asset portfolio may also have the positive impact of lowering its risk profile and thus, give CCT better leverage to negotiate for more attractive cost of debt going forward.
Looking for a better entry level. We maintain our estimates and keep our RNAV and fair value unchanged at S$1.16. With a projected total return of 8.4%, we maintain our HOLD rating on CCT. Potential share price catalyst could come from the outcome of the review for Starhub Centre and acquisitions. S$1.05-S$1.10 would be good entry level for accumulation, which would translate to a potential total return of 11.3%-16.6%.
CDL H-Trust – DBS
Like bees to honey
• Share price weakness not justified for improved portfolio stability post Australian acquisition
• Singapore tourist arrivals projected to increase 20-30% to 11.5 – 12.5m points to robust growth in 2010
• Offers best leverage to burgeoning Singapore hospitality sector, BUY TP S$2.11 based on DDM
Australian acquisition improves earnings stability. CDL HT’s share price has declined 8% vs the S-REIT index (+2%) since the announcement of its Australian portfolio acquisition in Jan’10. We believe that the current share price does not reflect the added stability of the portfolio given its (i) low beta proxy into Australia with its high minimum base rent of A$13.7m p.a secured over 11.3 years, and (ii) higher downside protection – DPU of 4 Scts per share (vs 2.5 Scts previously) backed by the trust’s base rent component. In addition, we see limited downside to earnings as we estimate that a depreciation of 10% in the AUD-SGD exchange rate will result in a 1% decline in distribution.
Best leverage to growth in Singapore’s tourism sector. CDL HT’s exposure into Singapore hospitality sector has not been diluted. The group will continue to benefit from the expected robust growth in visitor arrivals in 2010 given STB’s projection of between 20-30% growth, translating to demand of 10.9 to 11.9m room nights which represents 83-89% of total available room supply.
Opening of Universal Studios on 18th March 2010 to open tourist floodgates. With confirmation of the opening date, we believe that we will start to see visits to Universal studios flow through to strong headline visitor growth numbers from March 2010 onwards.
Fundamentals sound, maintain BUY, TP S2.11. The current share price weakness is an attractive entry point for investors to gain leverage into the stock. CDL HT offers one of the strongest FY09-11F DPU CAGR of c12.0%. Our BUY call and TP of S$2.11 is maintained offering a total return of 35%.
SREITs – BT
Better year ahead for Asian Reits: CBRE
S-Reits seen making better progress in resuming growth compared with their counterparts in the region
THE Asian real estate investment trust (Reit) market picked up in the second half of last year and should continue to improve this year, said CB Richard Ellis (CBRE) in a report yesterday.
In particular, Reits in Singapore (S-Reits) look like they are making better progress in resuming growth, compared with their counterparts in the region.
This year could also bode well for new Reit listings. ‘2010 will probably see the resumption of the initial public offering (IPO) market for Reits,’ reckoned CBRE Research Asia executive director Andrew Ness.
In H2 2009, the total market capitalisation of Asian Reits rose 17.6 per cent, the property consultancy said. Most Reits in the region managed to emerge from the credit crisis relatively unscathed, having raised funds from rights issues or rolled over their debts.
But some Reit markets went through a greater shake-up than others. In Japan, consolidation became the order of the day as four cases of mergers took place. One of these involved the merger of Advance Residence Investment and Nippon Residential Investment, as the latter’s sponsor went bankrupt.
Reits in Singapore and Hong Kong managed to withstand the storm better, even outperforming the main stock indexes in their markets. Between July and December last year, the FTSE ST Reits Index rose some 38 per cent.
‘Generally well managed by professional managers, S-Reits are unlikely to go under,’ CBRE said. ‘While their price movements can be volatile, S-Reits are considered a fairly safe haven in the long term.’
Although stock market conditions in Asia improved in the second half of last year, they were not attractive enough for most sponsors to set up and list a Reit. Just four new real estate funds went public in Thailand, according to CBRE.
But listing activity could return this year – there could be several new S-Reit listings in the pipeline, CBRE said.
Cache Logistics Trust is one that is due to go public soon. ARA Asset Management partnered logistics firm CWT to set it up, and the authorities have given the nod for listing. The Reit will start with six properties worth about $730 million in its portfolio.
ARA also said in December last year that it is working with Regency Group to list a Syariah-compliant Reit in Singapore. The Reit could be listed in the second half of this year and could hold some $1 billion worth of properties, largely from the hospitality sector in Qatar.
The market has also been awaiting the IPO of a commercial Reit by Mapletree Investments. The Reit would hold VivoCity shopping mall, among other assets.
Besides Singapore, Thailand could see more property funds going public this year, CBRE said.
Meanwhile, existing Reits could focus on buying assets and growing distributable income. ‘Further acquisitions are likely in the coming year as Asian Reits look to enhance their portfolio quality ahead of the full recovery of the real estate market,’ Mr Ness said.
Already, some S-Reits have been building up their portfolios. Last month, for example, CapitaMall Trust agreed to buy Clarke Quay for $268 million, and Ascendas Reit said that it would buy three properties for $228.5 million.